Greater Grady Task Force FINAL REPORT July www MetroAtlantaChamber com by armedman2


									Greater Grady Task Force


       July 13, 2007
                                                          Greater Grady Task Force
                                                                Final Report
                                                                July 13, 2007

Executive Summary .......................................................................................................................................... 3

Key Grady Takeaways ..................................................................................................................................... 4

Situation Analysis.............................................................................................................................................. 6

Task Force Recommended Solutions ............................................................................................................. 7

Task Force Background................................................................................................................................. 10

Formation and Charge of the Task Force................................................................................................... 10

Hospital 101 ..................................................................................................................................................... 10

United States Health Care Industry............................................................................................................. 11

Local and Regional Forces ............................................................................................................................ 11

Grady, the Region’s Critical Safety-Net Hospital...................................................................................... 12

Georgia’s Uninsured Population .................................................................................................................. 13

Trauma Centers .............................................................................................................................................. 14

Grady Health System Overview ................................................................................................................... 15

Governance Structure .................................................................................................................................... 16

Current Situation at Grady........................................................................................................................... 21

Current Funding Model................................................................................................................................. 22

Impact of a Grady Closure to Metro Atlanta............................................................................................. 24

Greater Grady Task Force Members .......................................................................................................... 25

Metro Atlanta Chamber of Commerce Staff Contacts
         Sam Williams                              Esther Campi                           Renay Blumenthal                            Che Watkins
           President                              Communications                            Public Policy                           Task Force Staff
        404-586-8434                               404-586-8474                             404-586-8466                             404-586-8468                                        

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

Executive Summary

The situation at Grady Health System (Grady) is critical and requires immediate, decisive action.

Modern healthcare delivery has dramatically changed the economic realities of internal and external
health care provider financing. Grady’s current financial model is outdated and flawed beyond
simple repair and the situation worsens by the day. And, although Grady is bordering on insolvency,
it cannot declare bankruptcy because it is a publicly operated hospital.

But, Grady’s situation can be addressed consistent with a bankruptcy philosophy: develop a plan for
revamping operations and restructuring the governance model; take that plan to the relevant
stakeholders; and pledge that by using this plan and their emergency funds, Grady will move to a
sustainable financial future. Grady has a unique opportunity to take advantage of the current crisis to
restructure and reconfigure operations to support long term viability.

Without Grady, health care for Metro Atlanta’s indigent population would overwhelm area hospitals
throughout metro Atlanta, particularly their emergency services. Grady’s failure and potential
collapse could create a “patient tsunami” for hospitals in the region and jeopardize trauma care in the
State. Everyone in the region would be affected, not just the poor and uninsured among us.

For example, the 2001 closure of D.C. General Hospital in the nation’s capitol caused a patient care
crisis. Thousands of emergency room and inpatient visits were shifted to nearby privately operated
Greater Southeast Hospital. As a result, in November of 2003, Southeast filed for bankruptcy when
its uninsured patient base reached 60 percent.

Even if Grady’s insured patient load could be absorbed by other hospitals, its uninsured patient load
could not be addressed. In addition, Grady’s closure would have severe consequences on area
medical schools both financially and academically. Grady is a nationally recognized major teaching
hospital and approximately one-fourth of Georgia’s doctors trained at Grady. The hospital’s closure
would jeopardize the accreditation of graduate medical education programs of both Emory Medical
School and Morehouse School of Medicine.

The dedicated medical professionals at Grady who care for almost 1 million patients each year
deserve the gratitude of the entire community.

The Task force determined that no one is to blame for the current crisis. The board should be
commended for reaching out to the Metro Atlanta Chamber, bringing in Alvarez and Marsal
consultants and asking for help from the community. We also commend the joint Fulton/DeKalb
Committee on Grady Hospital and the Georgia House Legislative Committee for taking on this issue.

The Task Force recommendations are focused on the following five areas:
            Restructuring the legal entity and changing the governance structure
            Restructuring hospital operations
            Addressing the short-term financial gap
            Addressing long-term financial solutions relating to operations
            Addressing long-term financial solutions relating to capital

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

Key Grady Takeaways

While the Recommendations and Situation Analysis are presented in the next sections, these nine key
takeaways are the major conclusions of the Task Force.


1. Restructuring is the critical first step for Grady’s success.
      Like every other urban hospital authority in Georgia has done, Grady must restructure to take
      advantage of money-generating services and to remove the politics from the day to day
      management and operations of the hospital.

2. Even with a restructure, the Fulton-DeKalb Hospital Authority (Grady Board) remains in
       Even with the creation of a 501(c)3 and board, the current Grady board remains in place.
       Fulton and DeKalb counties, through the Grady Hospital Authority, still remain as the
       facilities owner and maintain bonding authority, while the new 501(c)3 provides governance
       and oversees hospital operations.


3. Bridge funding and other revenue sources will not be available unless Grady restructures.
      Grady is in dire need of $120 million in short-term cash (including $65 million to pay the
      medical schools and $55 million for operating and immediate capital needs). Potential
      sources for that cash are not willing to invest in “business as usual.”

4. Just charging other counties will not solve Grady’s financial crisis.
       Grady sees uninsured patients from other counties and vice versa. While Grady is probably
       uniquely disadvantaged in this intercounty treatment of patients and while there needs to be a
       net sharing agreement among counties, this alone will not solve Grady’s financial situation.
       Grady needs to focus on restructuring, overhauling operations, and identifying funding
       sources for long-term sustainability.

5. Grady’s overall funding needs total $370 million plus $50 million every year for operations.
      Grady needs an estimated $370 million to accomplish a two-year turnaround ($120 million in
      short-term funding to overhaul operations, pay the medical schools and address immediate
      capital needs; plus $250 million for badly needed long-term capital improvements). In
      addition to the $370 million to accomplish the two-year turnaround, the hospital also needs
      $50 million every year to cover an annual operating deficit that will continue to occur even
      after Grady is strong again simply because Grady cares for so many uninsured patients.

6. The long-term fix for Grady must include new revenue sources and new partners.
      In order to obtain financial sustainability for the long term, the following revenue sources
      must be part of the solution: new money-generating services through the new 501(c)3 and
      new capital investment; an increase in funding from Fulton and DeKalb counties and other
      governments that is indexed to a cost of living or CPI index; a per-patient chargeback to
      surrounding counties for all indigent patients treated at Grady from the county netted against
      Fulton and DeKalb indigent patients treated in those counties; an increase in the state-funded

                                     Greater Grady Task Force
                                           Final Report
                                           July 13, 2007

           allowance for doctors in training; state funding to support a statewide trauma network; and an
           increase in the federal matching funds the state distributes to hospitals that treat the indigent.

Community Support for Grady

   7. Grady’s problems are nobody’s fault.
         A combination of skyrocketing medical costs, increasing population and decreasing payments
         from all of Grady’s fund sources over time have created the most dire financial situation in
         Grady’s 115-year history.

   8. Grady is too valuable a resource to let close.
         With its level 1 trauma designation, 5000 employees, 953 patient beds, and over 1 million
         patient admissions annually, Grady is a vital health resource and critical asset to this region
         and state. Additionally, it is a premier teaching hospital, training one out of every four
         doctors throughout the state of Georgia. A Grady closure would create a “patient tsunami”
         throughout the region’s hospitals.

   9. This Task Force stands prepared to help going forward.
         While Grady’s challenges are daunting, the hospital can and must be saved. The critical first
         step is the restructure and the first “domino” that has to happen is the Grady board’s
         willingness and leadership to take this bold step. This Task Force, the leadership of the
         business community and the Metro Atlanta Chamber of Commerce stand ready to assist if
         asked. The Task Force is also prepared to recommend a highly effective slate of community
         leaders of the caliber and expertise needed to serve on the new 501(c)3 board.

                                  Greater Grady Task Force
                                        Final Report
                                        July 13, 2007

Situation Analysis

In the past, deteriorating financial conditions have initiated some temporary solutions and some
incrementally improved internal operations. Nonetheless, the current Grady situation is grave. Public
hospitals nationally face a crippling convergence of negative trends, notably anemic financing for the
uninsured and below-cost reimbursement particularly for publicly insured (Medicaid and Medicare)
populations. Indeed, Grady’s situation is the result of three mitigating factors that have exponentially
added enormous pressure over time:

          Payments, from a variety of sources, have remained flat or declined over time.
          The region’s indigent care population has dramatically increased and the number of
          patients that Grady sees has also increased.
          Health care costs have skyrocketed.

A narrow historic focus on short-term fixes rather than strategic long-term restructuring of the
system’s operation and financing model has left untenable gaps in operational efficiencies and
productivity. The result – Grady Health System’s abilities and capacity to continue to carry out its
mission have reached a crisis point and unless immediately and strategically addressed, Grady will
close its doors.

This crisis is not the result of any one short-term event; the resolution cannot be another incremental
fix. Currently Grady is losing $8 million per month which includes payments to the medical schools
that are in arrears (they are losing $3.5 million on operations). Resolution of the current situation
requires two major interventions:
           Transform the business model and operations to re-align the hospital with market realities
           and economic conditions of the health care industry.
           Secure immediate operational and bridge financing to eliminate the immediacy of the
           dangerous cash flow and cash reserve inadequacies, enable payment of current business
           obligations especially the schools and provide accountable seed financing for the above
           long-term transformational changes.

There is ample evidence that Grady must be transformed:
          Total spending for hospital services in the United Stated increased at double-digit rates in
          recent years. In the meantime, Grady public funding from its chartered counties, DeKalb
          and Fulton, has remained flat since 2000. In 2004, Grady provided $171.2 million in
          indigent and charity care and $187.6 million in 2005, while receiving just $105 million in
          each of those years from DeKalb and Fulton.
          The Hospital Authority was a reorganization based on best practices of the 1940s. Since
          the 1970s, the Authority structure has been increasingly ineffective. Newer non-profit
          business models for integrated delivery systems have emerged to be more effective and
          efficient. The current Authority legal entity is outdated competitively and a barrier to
          necessary change.
          The situation gets worse by the day and will soon be beyond repair.

If the Metro Atlanta area and the State of Georgia are going to attract future employers and maintain
those already here to the region, they must have a working health care network that provides superior
care for all citizens and effectively manages increasingly scarce health care resources within
community priorities and with accountability. Grady has a unique position as the leading safety net
hospital and a unique role within the medical services of Georgia. Grady is vital for this future.

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

Task Force Recommended Solutions

Concurrent with the work of the Task Force, the Fulton-DeKalb Hospital Authority engaged the firm
of Alvarez and Marsal to formulate a business plan for Grady within six months. This made it
possible for the Task Force to obtain significant insight, both data and anecdotal, into the Grady
current state without having to duplicate efforts that would have been even more burdensome on
Grady’s time and resources. We have used Alvarez and Marsal financials and other data but have not
audited the source. The remainder of this report draws on, but is not limited to, the work of Alvarez
and Marsal as a source for its recommendations.

Restructure the Legal Entity and Change the Governance Structure - The legal structure of Grady is
misaligned with the realities in the current health care industry manifested since the enactment of the
Hospital Authorities Act of 1941. Correspondingly, the governance system is also outdated.
          Every hospital authority in an urban area of Georgia has converted to a nonprofit 501(c)3
          model and Grady should follow suit. Grady’s hospital authority has remained largely
          unchanged since its creation under the Georgia Hospital Authorities Act in 1941.
          In most of these model structures, the current hospital authority remains a facilities owner
          and establishes a contractual operating arrangement with the new 501(c)3 nonprofit
          organization. The contractual agreement would provide for fiduciary responsibility while
          enabling the new Grady Health System to enter into new and significant revenue streams
          and reimbursable services that are integral to the evolved health services industry, for
          example, non-emergency transportation and durable medical equipment. More details on
          the mechanics of restructuring can be found beginning on page 14.
          Necessary restructuring agreements can be authorized by the current Grady Board and the
          Fulton and DeKalb county commissioners.
          The governance system must also be restructured to protect the interest of the communities
          providing funding but should also be representative of the community, including the
          necessary expertise to oversee an operation the size and complexity of Grady. The board
          should also be non-political in nature.
          The new legal structure must protect Grady’s status as a governmental hospital for purposes
          of making intergovernmental transfers and receiving special Medicaid payments.

Restructure Hospital Operations - The new 501(c)3 nonprofit board and current CEO must undertake
a major operating intervention to revamp the operating procedures at Grady.
          Grady’s leadership needs to immediately refine and articulate a clear strategy to drive the
          recommendations within the Alvarez and Marsal plan and any new initiatives based on the
          experience of the current management team.
          Within this strategy, Grady needs to immediately execute a targeted cost reduction and cash
          flow improvement effort without endangering patient care through a defined process that
          enables the effort to be tracked, measured and reported. The Alvarez and Marsal study
          recommends a number of these crucial initiatives.
          Grady needs to install a bankruptcy type turnaround management firm capable of leading a
          restructuring and turnaround effort on this scale. Proposals should be obtained from firms
          that have the ability and a selection made as soon as the new board is in place. Firms with
          the capability of immediately installing experienced key personnel and management
          support should be considered. However, it would be a mistake to invest heavily in
          turnaround fees, new assets and technology without having addressed the governance and
          organization issue and the short-term funding first.
          The current management team needs assistance addressing the short-term and long-term,

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

          deeper-rooted operational and information technology problems. The scale of the
          underlying problems is significant, but transitionary in the sense that the turnaround is a
          one-time occurrence and once resolved Grady would be operating with a sustainable
          leadership and management model – both in terms of numbers and skill sets. A very
          different perspective is needed during turnarounds than during on-going operations.

Address Short-Term Financial Gap - The current cost-reduction plan cannot correct the short-term
crisis and there will need to be an injection of bridge funding approximating $120 million to keep
Grady operational until a total restructure is complete (2-3 years).
         The cash shortfall for 2007 is projected at approximately $120 million (including the
         payments of $65 million to the medical schools that are in arrears and short-term capital
         requirements of approximately $20 million). The remaining bridge financing will be used to
         support current operating losses. Current vendor relationships are strained. Grady is
         obtaining key supplies via COD.
         In the procurement area, major economics are achievable. All major contracts with third
         parties such as utilities, service/maintenance, cleaning, including the medical schools should
         be evaluated and potentially renegotiated. However, cost control alone is not enough to
         overcome a formula-based underfunding of costs. We also note that the medical schools are
         both major vendors and significant sources of revenue in the form of federal and state
         reimbursements for graduate medical education and in the ability to attract major grants for
         patient care.
         The recommended combination of sources of bridge funding are Fulton County, DeKalb
         County, the State of Georgia, other regional counties, foundations, bank bridge loans as well
         as any near-term operational efficiencies and improvements the new Grady board can
         One source of potential cash is converting Grady’s accounts receivable to cash. As pointed
         out in the Alvarez & Marsal report, Grady has a significant amount of its days in receivables
         in denial status as a result of inefficient systems.
         Grady has considerable real estate holdings that are not encumbered with debt. Proposals
         should be obtained from experienced real estate firms to help the restructured board evaluate
         sale or sale/leaseback opportunities of these substantial assets.

It is the opinion of the Task Force that any short-term financing will only be available with a change
in the governance structure of the hospital.

Address Long-Term Financial Solutions (Operations) – Assuming the short-term problems are fixed,
Grady will need approximately $40 million - $55 million per year. Grady’s unique role as a safety
net hospital will not allow it to make a profit. The most logical sources of that funding are a
combination of the following:
       Certain medical treatments or capacity to perform important public health functions will have
       to receive funding from sources outside normal patient cost recovery. Current Medicare and
       Medicaid reimbursements are only 75-80% of actual costs.
       An increase in funding from Fulton and DeKalb counties and other governments that is then
       indexed to a cost-of-living or health care CPI applied to the annual payments..
       A per-patient chargeback to surrounding counties for all indigent and charity patients treated
       at Grady from that county netted against Fulton and DeKalb indigent patients treated in those
       Work with the State of Georgia to obtain the following: an increase in the state-funded
       allowance for each medical resident to better compensate for the cost, funding to support a

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

        statewide trauma network and a review of the state’s Disproportion Share Funding formula.

It is the opinion of the Task Force that any long-term financing will only be available with a change
in the governance structure of the hospital.

Address Long-Term Financial Solutions (Capital) - The facilities and equipment at Grady are all in
dire need of capital. As with the long-term operating potential shortfall, it is impossible to identify
the exact amount of the need, but given the capital spending level of like institutions versus Grady
over the last 10 years, the “catch-up capital” is in the $200 million - 300 million range. A major
portion of that capital is for equipment and the short-term needs are critical. With a new charter and
non-profit status, Grady could seek innovative funding and partnering arrangements.
        The issue is what to fund on a short-term basis and how to fund it. After the new governance
        system is in place for a year, Grady should develop scope and funds for major capital
        A significant investment must be made in Grady’s information systems and technologies.
        Alvarez and Marsal recommended an investment of $74 million specifically for Grady’s
        information systems. Grady’s information systems and technologies are well behind the
        market and inadequate to support a large academic health system. Grady’s lack of modern
        systems results in increased costs and decreased efficiency.
        In addition, Grady must identify the critical needs and seek bonded debt to fund long-term
        capital. While Grady can issue new bonds through Fulton and DeKalb, a revenue stream
        must be identified to service the debt. The level of Grady’s capital needs will most likely
        require a $10-15 million a year debt service. Grady must have a dedicated, independent,
        predictable and recurring revenue stream to service the additional debt.

                                  Greater Grady Task Force
                                        Final Report
                                        July 13, 2007

Task Force Background

As requested by the Fulton-DeKalb Hospital Authority, the governing body for The Grady Health
System, the Metro Atlanta Chamber of Commerce created the Greater Grady Task Force in March
2007. The Task Force was formed to identify and assess a range of issues threatening Grady Health
System’s long-term viability.

The Task Force began its work in April to develop a set of recommendations to ensure the long-term
viability of Grady. It is widely agreed that Grady is too important a regional asset to lose. And as a
practical matter, this region cannot afford to let it close. Regional hospital capacity to care for the
type of complex patients that comprise Grady’s primary case load is inadequate. The patients least
capable of paying are more dependent on Grady than any other hospital. Grady provides the only
Level 1 trauma services in a 100-mile radius. Further, the loss of Grady as a teaching hospital could
have adverse consequences on the Schools of Medicine, both of which rely on Grady as a source for
Graduate Medical Education. Statewide, approximately one-fourth of Georgia’s doctors trained at

The Grady board had also recently engaged Alvarez & Marsal, a national health care industry
restructuring firm. The Grady board should be acknowledged for their leadership and willingness to
engage these consultants, as well as their request for assistance from the business community.

Formation and Charge of the Task Force

The Greater Grady Task Force is comprised of 17 key and diverse business leaders who recognize
that Grady Memorial Hospital is a critical health resource for our region, and a vital part of the fabric
of this community. A list of these citizens can be found on our website. The Task Force has no
official authority and is not seeking such. The Task Force convened on four separate dates, those
meetings were public and key stakeholders and the media have been invited to every meeting.

The Task Force vision was to produce a set of observations and recommendations based on major
pressure points for insolvency. The Task Force committed to spend 90 days understanding and
studying Grady’s finances, governance structure and operations before producing a final report that
would provide observations and recommendations. This report is the final conclusion of the Task
Force’s work.

Hospital 101

Hospitals in the United States operate within a number of structural models including large for-profit
companies (for example, HCA, with 190 hospitals; Tenet, with 80; and Community Health Systems,
with 70), non-profit hospitals such as the array of faith based systems, public hospitals (Grady is an
example) and Federal Government Hospitals (these include the Veteran’s Administration, military,
US Public Health System and US Maritime Hospitals). Hospitals and their associated health care
services are further organized into regional or national networks or systems.

Hospitals must pay close attention to operations and costs, because the hospital usually receives a
fixed amount of revenue per patient and must bear actual costs themselves. Labor is generally the
largest single operating cost item, often exceeding 40% of revenue. Relentless advances in
technology and increasing demands for competent information technology also strain hospital

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

Healthcare organizations typically do not get into trouble overnight. Problems mount over an
extended period of time, frequently five to ten years or longer. An improvement plan that addresses
strategic, clinical, operational and financial performance should be developed, implemented,
monitored and adjusted as needed.

United States Health Care Industry

The United States health care industry is facing many challenging issues, almost all of which are
relevant to Grady. Hospitals have the complex responsibility of evolving into competitive businesses
while simultaneously adhering to a dizzying array of regulatory, fiscal, personnel, and public health
challenges. Grady faces additional challenges as a “safety-net” hospital. Some of the challenges
facing hospitals and health systems are listed below.

        Demand for healthcare services is currently driven by a surge in volume. This includes
        population growth, the aging population, managed care backlash, advancing medicine and
        specialty competitors (as opposed to other industries, in health care, supply can lead to

        The regulatory environment in which hospitals operate is increasingly demanding and
        requires hospitals to provide certain generally unprofitable services as a condition for public
        payment and licensure.

        There are an increasing number of uninsured and under insured in the population placing an
        additional strain on hospital finances and operations.

        The physician, nursing, and allied health workforces are not growing apace demand for
        healthcare services.

        Reimbursement for healthcare services is misaligned and under pressure from several angles.
        The primary government payment systems (Medicare and Medicaid) have not shifted
        reimbursement priorities apace market demands. In Georgia, Medicaid reimbursement rates
        are typically below cost.

        Market forces and a new wave of “consumerism” are combining to push hospitals and health
        systems into the unfamiliar territory of having to compete based on performance.

Local and Regional Forces

Other forces in the local environment include:
          Disintegration of the Fulton County tax base by charter of new cities
          DeKalb Medical Center recently closing its level 2 Trauma Center
          Lack of a statewide trauma center network and appropriate funding

                                  Greater Grady Task Force
                                        Final Report
                                        July 13, 2007

Grady, the Region’s Critical Safety-Net Hospital

Grady is the region’s pre-eminent safety-net provider and a major academic medical center. This
dual role makes Grady a unique community resource. As an academic medical center and safety-net
provider, Grady:

          Provides clinical services for everyone regardless of their ability to pay for services;

          Serves, by choice and consistent with its mission, a disproportionately high share of the
          area’s vulnerable populations;

          Educates and prepares physicians, nurses, and other vital healthcare workforce members to
          provide services to Grady and to the regional and statewide market;

          Maintains 24/7 stand-by capacity and resources to support services that other institutions in
          the area would be unlikely to provide such as acute burn care, Level I trauma services, and
          neonatal intensive care services;

          Conducts research and scholarly activity that adds to the body of medical knowledge for the
          region and supports the medical education programs, and;

          Materially contributes, through its employment base, revenue production, and consumption
          of goods and services, to the economy of the region.

By catering to a largely indigent population, Grady incurs certain costs that are not borne by many
other hospitals. For example, the patients at Piedmont or Northside Hospital generally have homes to
go to and a social network that provides outpatient care and required support once a patient is
discharged. Many of Grady’s patients, on the other hand, are retained in the hospital because of
lacking adequate housing and social support networks. Those patients would be at risk for not
receiving adequate post-hospitalization care.        The resulting increased lengths of stay are
representative of a range of reasons for Grady’s overall higher cost per patient. Typically, the
medically indigent tend to suffer from more severe medical problems as compared to individuals with
ready access to medical care, proper nutrition, adequate housing and social networks.

According to the Alvarez and Marsal report, Grady’s payor mix is significantly different from other
area hospitals in their primary service area. Based on 2005 MedStat data, only 8% of the inpatients
have some sort of commercial insurance and 17% are uninsured. Medicaid and Medicare inpatients
represent 42% and 20% respectively. The remaining 13% fall into a category called Medicaid
pending which are patients attempting to get onto Medicaid rolls. Some of these patients are
eventually deemed ineligible and fall back into the uninsured bucket. Based on 2004 outpatient data,
the breakout is as follows: Medicare (15%), Medicaid (28%), Commercial (4%) and Uninsured

Unlike other hospitals in the region, Grady has little if any opportunity to shift costs to other sources
of revenue based on current payer mix and mission. Grady is, therefore, unable to offset the higher
costs incurred in caring for its patients across a broad array of payer sources. Grady’s payer mix is so
skewed, that it could not expect to reasonably obtain adequate rates from private insurers to make up
for the entirety of its revenue shortfall.

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

Grady is eligible for payments from the State of Georgia Indigent Care Trust Fund (ICTF). The ICTF
was established in 1990 to expand Medicaid eligibility and services; support rural and other
healthcare providers, primarily hospitals, which serve the medically indigent; and fund primary health
care programs for medically indigent Georgians. The ICTF is primarily responsible for operating the
State’s Disproportionate Share Hospital (DSH) program. The DSH program is funded through a
matching program with the Federal Government that works to increase health care access for the
poor. Hospitals that treat a "disproportionate" number of Medicaid and other indigent patients qualify
for DSH payments through the Medicaid program based on the hospitals’ estimated uncompensated
cost of services to the uninsured. The DSH program represents the largest component of the ITCF
payments distributed through Georgia Medicaid.

In order to qualify for DSH, a hospital must satisfy both federal criteria and at least one of the state

Federal criteria:
   • Provide non-emergency obstetrical services to Medicaid recipients (if those services were
       provided since December 22, 1987)
   • Have a Medicaid inpatient utilization rate of at least one percent

State criteria:
   • Inpatient utilization rate greater than the mean rate plus one standard deviation
   • Low-income inpatient utilization rate greater than 25 percent
   • Medicaid charges greater than 15 percent of total charges
   • Hospital with the largest number of admissions in its area
   • Children’s hospital (Grady does not meet)
   • Hospital designated as a regional perinatal center
   • Hospital designated a Medicare rural referral center and a Medicare DSH provider (Grady
        does not meet)
   • State-owned and operated teaching hospital (Grady does not meet)
   • A small, rural public hospital with a Medicaid inpatient utilization rate of at least one percent
        (Grady does not meet)

Grady accesses its funds by paying an assessment to the State which is used to obtain matching funds
from the federal government. Direct hospital payments are typically available within 1-3 weeks of
the hospital assessment. Payment could be made in one lump sum. However, the payment for fiscal
year 2005 was split into an interim and a final payment and was received during fiscal year 2006.
Federal funding for this program is capped for the state of Georgia. So to the extent new hospitals
qualify for inclusion in the program, funding for each participant is diluted. In fact, the number of
hospitals now eligible for funds is approximately 100 out of 160 total hospitals in Georgia. This is up
from just 40 hospitals that were eligible 5-6 years ago.

Georgia’s Uninsured Population

While many of the Task Force’s recommendations are focused on operations and governance,
research shows alarming trends surrounding Georgia’s uninsured population that could impact
Grady’s long-term sustainability and pose implications for the Atlanta safety net. The share of the
population that lacks insurance is growing in Georgia and in metropolitan Atlanta. At the current rate
of increase, the projected number of uninsured in the state will exceed 2 million by 2008. About 37
percent will live in the five-county metropolitan area. Uninsured, or uncompensated care, and

                                  Greater Grady Task Force
                                        Final Report
                                        July 13, 2007

Medicaid patients make up about 75 percent of Grady’s total patients. Only 7 percent of Grady’s
patients are privately insured.

Grady captures only 1 percent of the metro area’s privately insured patients, while it admits more than
one-fifth of the market’s Medicaid patients. If Grady were to close, the market likely would
experience significant capacity constraints and a period of major readjustment as these patients seek
care elsewhere. Grady’s contribution to Atlanta is altruistic, as it cares for those in the community
who need care the most. Grady actively seeks the underserved and uninsured and is a cornerstone
component of the Atlanta safety net. The threat of its closure illuminates a need for the metro Atlanta
community to have serious discussions about Grady and the Atlanta safety net’s long-term

The research calls for a broad cross-section of the metro community, including business, consumer,
provider, government and philanthropic entities, to examine metro Atlanta’s rising number of
uninsured, safety net, patient flows across county lines, and strategies implemented in other urban
markets. These entities can together develop a strategy that makes the best use of metro Atlanta’s
existing and potential resources to serve the needs of its growing safety net population in the most
effective and health-promoting way.

Trauma Centers

A Level I trauma center provides comprehensive care for the most critically injured individuals.
Level I trauma services are supported by research, outreach and teaching facilities. Comprehensive
care means that the hospital is capable of caring for any and all acute injuries in the region from
admission through recovery and discharge from the acute hospital. Trauma centers maintain
extraordinary amounts of professional staff and equipment on site 24 hours a day, seven days a week
to immediately care for patients arriving after vehicle crashes, falls, shootings and other incidents. To
be designated a trauma center, hospitals must meet guidelines established by the state and the
American College of Surgeons’ Committee on Trauma.

Georgia has four Level I trauma centers (Grady, Memorial Health University Medical Center in
Savannah, Medical College of Georgia Health Systems in Augusta and the Medical Center of Central
Georgia in Macon), which handle the highest level of traumas, seven Level 2 Trauma Centers, one
Level 3 Center and one Level 4 Center. In general, Level 2, 3 and 4 Centers can provide some acute
care but typically provide initial evaluation and assessment of patients who likely will be transferred
to facilities with more comprehensive resources.

By comparison, in North Carolina, eight level I trauma centers are spread throughout the state so that
most patients can get to care within one hour. Millions of Georgians are more than two hours from
trauma care. Patients typically arrive at trauma centers via ground ambulance, helicopter or walk-in.
At least 26% of trauma patients that come to Grady originate from outside Fulton and DeKalb
counties. Federal law requires that any trauma patient arriving at Grady must be treated except in rare
circumstances when the emergency room in over capacity.

Only 15 hospitals out of 152 in Georgia participate in the voluntary trauma network, which currently
receives no state funds, and DeKalb Medical Center recently announced plans to drop out. Another
five left or lost their trauma designations in 2002. Georgia’s cost of uncompensated trauma care by
hospitals, physicians and EMS providers is estimated at about $250 million a year. The cost to

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                                        July 13, 2007

individual hospitals depends on the types of traumas. Grady treats about 3,700 major trauma patients
annually, resulting in an estimated $42 million in uncompensated care.

Georgia is in the process of considering a more organized statewide trauma care system through a bill
recently signed by Governor Perdue. Senate Bill 60, sponsored by Senator Cecil Staton, R-Macon,
created a nine-member commission to oversee any state money set aside to help fund the costs trauma
care hospitals incur. State health officials estimate the state needs to double the number of certified
trauma care hospitals (currently 15). A panel co-chaired by Sen. Staton estimated it would take as
much as $85 million to shore up the network and encourage more hospitals to take part. It should be
noted that as recently as June, two Level I trauma centers in Georgia (MCG Health System in
Augusta and the medical Center of Central Georgia in Macon) have said they will consider pulling
out of the troubled network altogether.

In the world of increasingly complex medical procedures and rising costs, per patient reimbursement
does not generally support the infrastructure costs required to build, staff and maintain Level I trauma
services. The cash costs are front-end loaded, while the reimbursable cash payments come in small
increments only months and years later. For Level I trauma centers in particular, there is
extraordinary large personnel costs to keep trauma staff and physician specialists like neurosurgeons
on site, not on call, 24 hours a day, 7 days a week.

Grady Health System Overview

Grady Facts

•   Grady Health System was the vision of Henry W. Grady, editor of the "Atlanta Constitution,"
    who worried about the lack of quality health care for Atlanta's poor. In 1892, his extraordinary
    dream came true when the doors to Grady Hospital were officially opened. Grady opened on
    June 1, 1892, with 18 employees and 100 beds, roughly 50 each for blacks and whites. Since that
    time, Grady Health System has grown considerably from its original three-story facility - and
    now stands as one of the largest public health systems in the United States.

•   Grady sees more than 30,000 inpatients and almost 1 million outpatients each year. The hospital
    employs more than 5,000 people, has approximately 900 community volunteers, consists of 953
    beds and 17 operating rooms.

•   Grady provides more than 200 specialty and subspecialty health care clinics. Included within
    Grady Health Systems are Grady Memorial Hospital; Children’s Healthcare of Atlanta at Hughes
    Spaulding, which is operated as a Children’s affiliate; Crestview Health and Rehabilitation
    Center; the Infectious Disease Program; and 10 neighborhood clinics, including one at the airport.

•   Grady also has the only Level 1 trauma center in the region – the next closest one is in Macon –
    and has a nationally acclaimed ER, one of only two regional burn centers, diabetes center and the
    Georgia Cancer Center for Excellence. It also houses the state’s only poison control center,
    obstetrics intensive care unit and comprehensive sickle cell center.

•   Grady’s 39-bed Neonatal Medicine division provides comprehensive care for premature and
    high-risk babies. Patients are transported there from all over the state. Ninety percent of the
    babies there are on Medicaid and Medicaid payments typically do not cover the cost of care of
    these infants.

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                                        Final Report
                                        July 13, 2007

•   Grady is also a major teaching hospital. Remarkably, one out of every four doctors practicing in
    the state of Georgia was trained at Grady. In 2005, 54% (413 out of 771) of interns and residents
    who trained at general hospitals in metro Atlanta were trained at Grady. The hospital is staffed
    exclusively by doctors from Emory and Morehouse schools of medicine.

Governance Structure

Current Structure
Grady Hospital was initially owned and operated by the City of Atlanta and a private self-
perpetuating Board of Trustees. The Fulton-DeKalb Hospital Authority (DBA Grady Health System)
was established under the Hospital Authorities Act of the Georgia General Assembly in 1941. As a
result of that Act (O.C.G.A 31-7-70), the Authority was created by Resolution of the Board of
Commissioners on August 6, 1941 to oversee the operations of Grady Memorial Hospital and other
public health facilities. Membership consists of ten trustees. The Board of Commissioners of Fulton
County appoints seven and the Board of Commissioners of DeKalb appoints three. The Fulton
County Code does not prescribe the method of appointment; however, historically each commissioner
has appointed one person to serve. The DeKalb appointees are generally made by the DeKalb County
CEO. Terms are staggered for four years. There is no compensation. Meetings are held bi-monthly
on the fourth Monday of the month.
The Hospital Authorities Act was last revised in 1964, prior to the enactment of Medicare and
Medicaid. Many hospital authorities across Georgia have restructured their operating organization to
take advantage of the increased operational and governance flexibility and expanded business
opportunities which are afforded private nonprofit hospitals and their affiliates. Every other urban
hospital authority in Georgia has restructured except Grady. Georgia law authorizes such
organizational restructurings of public hospitals.

The most notable example of a restructuring is University Hospital in Augusta, owned by the
Richmond County Hospital Authority. The Richmond County commissioners sued to try to stop the
restructuring. The case went to the Georgia Supreme Court, which provided a ruling that the lease of
the hospital was a valid exercise of the hospital authority’s power and that the previous finding that a
lease would not promote the community’s public health needs was clearly erroneous. In fact, the
court stated that a hospital must attract private-paying patients or else it will become a deficit-ridden,
indigent-only hospital, dependent upon tax dollars to keep its doors open. As the Georgia Supreme
Court noted in its unanimous opinion over 20 years ago approving corporate restructuring: “The
hospital, as leased, would be in a better position to serve the public-health needs of the community
than when operated by the Authority.” Richmond County Hospital Authority v. Richmond County,
255 Ga. 183 (1985).

Benefits of a Restructure
Among the potential benefits that have prompted hospital authorities to convert their operations to
private non-profit corporate status is one or more of the following:

        Revenue Generating Services - The courts historically have construed the statute narrowly to
        preclude hospital authorities from engaging in certain health care activities that private health
        care corporations (either nonprofit or for-profit) could undertake. New revenue sources and
        reimbursable services not specified in the “powers” section of the Hospital Authorities Law
        may become available under a restructuring. This would enable Grady to develop a broader

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                                        Final Report
                                        July 13, 2007

        scope of profitable services to help underwrite its indigent care responsibilities. Examples
        would include non-emergency transportation and patient medical equipment.

        Reduces Political Pressures - A restructured, private 501(c)3 is less susceptible to the political
        pressures that often affect the operations of a political entity such as a hospital authority. The
        current appointment process could lead to a board that may see itself as representing a
        particular constituency as opposed to representing the institution as a whole.

        Joint Ventures with Physicians - Limitations as to equity joint ventures with physicians
        and/or other health care providers can be overcome.

        Flexibility to Manage - Management flexibility and responsiveness will be enhanced,
        allowing a hospital to act quickly and decisively to market opportunities and to respond to
        competitive threats.

        Geographic Scope - Limitations on the allowable geographic scope of facilities owned by
        hospital authorities can be avoided through ownership by a restructured operating entity.

        Competition - In general, a formerly public hospital will be placed on equal footing with its
        competitors in terms of governance and operational flexibility and allowable scope of health
        care services, when it converts to private nonprofit status.

Steps for a Restructure

Appoint Restructuring Transition Team
Once it is determined by Fulton and DeKalb counties along with the Fulton-DeKalb Hospital
Authority that a restructuring is necessary, a restructuring transition team should be appointed in
order to execute the process. Potential membership examples would include:

        The Hospital Authority chair;
        Other Authority members;
        The hospital CEO;
        Any regional and state representatives that may be involved in the new organization;
        Community, business and financial representatives;
        Physician representatives; and
        Technical experts including attorneys, accountants and consultants.

The transition team and the attorneys should review the existing Charter of the Authority and bond
documentation in order to determine if there are any existing restrictions regarding a possible
restructuring. Overall, the restructuring transition team assumes the lead on the restructuring tasks,
keeps the Hospital Authority informed, and seeks approval of the Hospital Authority board as and
when needed.

Set Goals and Objectives
Once the restructuring transition team is established, it is important for that group to immediately
establish a commitment to a coordinated healthcare system. Restructuring is an intense and detailed
process and everyone must be committed to the best outcome possible for Grady Health System. The
team would then set a proposed timetable for the restructuring and designate outside professionals to

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                                       Final Report
                                       July 13, 2007

assist with the restructuring (accountants, attorneys, consultants) and to participate in the transition
team deliberations.

Develop Organizational Structure
From a structure perspective, the Hospital Authority typically has two options for restructuring:
creating a single corporation structure or a parent holding company structure. The single corporation
is the simplest form and is recommended by the Greater Grady Task Force. Under this structure, the
Hospital Authority (the current Grady Board) would lease its hospital to a private 501(c)3 nonprofit
corporation (hereafter referred to as the Hospital Corporation) for a term of 40 years (as allowed
under Georgia Hospital Authorities Law) for an annual rental amount equal to the principal and
interest payments on the hospital’s outstanding bonds and other indebtedness. In exchange for
managing the operations of the hospital, the Hospital Corporation would acquire the operating assets
and assume the liabilities of the Hospital Authority, while the Authority would continue to own the
real and personal property as lessor.

       Fulton and DeKalb
      County Commissioners


      Fulton-DeKalb Hospital                 Lease Agreement                      New 501(c)3
             Authority                                                        (Hospital Corporation)
                                           Debt Service Payments

Under the parent company structure, the Hospital Corporation and any other health-related affiliates
would become wholly-owned subsidiaries of a parent corporation. The Hospital Authority would
lease the hospital facilities to the subsidiary level Hospital Corporation which would then be
controlled by the parent.

Implementation of the parent holding company structure would be more time consuming than a single
corporation structure and is not recommended by the Greater Grady Task Force. This is mainly due
to the need to secure a private letter ruling from the IRS which describes the tax consequences of the
restructuring and related asset transfers with respect to a parent holding company structure.
Obtaining a letter from the IRS typically takes about 6 months to a year to obtain. Hospitals
sometimes recognize the immediate need to reach goals that can be achieved through a restructuring
and use a phased approach to implement. The lease of the public hospital to the Hospital Corporation
would be executed in the first phase. At a subsequent date in the second phase of restructuring it is
recommended that the necessary asset transfers to be made to capitalize a parent company and other

With the single corporation structure, there are defined roles and responsibilities for each entity
involved in the restructuring. It is important to note that at no point does the Fulton-DeKalb Hospital
Authority go away – it remains in existence. There are specific functions that are performed by the
Authority and the members are still selected via the same process. The division of roles and
responsibilities is as follows:

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                                        Final Report
                                        July 13, 2007

          Fulton-DeKalb Hospital Authority                      New 501(c)3 nonprofit corporation

     Owner of facilities and “landlord”                      Manage and operate hospital

     Lease assets to 501(c)3 (Hospital                       Lease assets from Authority

     Continue to coordinate funding of indigent              Manage indigent care program
     services through contracts with counties and
     the new Hospital Corporation

     Continue as vehicle for tax-exempt financing            Community accountability

     Receive annual reports/audited financial                Prepare budgets/financial statements and
     statement per statutory requirements and as             audits
     “landlord” monitor Hospital Corporation’s
     compliance with the lease

Advance Notice
State law (O.C.G.A. 31-7-74.3) requires that any hospital authority seeking a restructuring must
provide advance notice and a public hearing in each county (Fulton and DeKalb) must be held
relating to the restructuring. The hearing must be held 60 days prior to the lease becoming effective,
60 days notice must be given prior to the meeting and the notice must be published three times by the
hospital authority. At each such public hearing, the Authority typically discusses the reasonable
foreseeable beneficial and adverse effects of the restructuring. In addition, the Authority provides a
financial statement indicating the estimated value of the total assets and liabilities to be transferred or
received in the restructuring and the resumes of the top five executive officers who will manage the
facility after it is leased.

Organize the Board of the New Corporation
An important action required in connection with a restructuring is the designation of membership
criteria and selection of initial members of the board of directors for the new Hospital Corporation.
The members of the board should be selected in order to further establish goals such as the following:

          To provide for participation of physicians and key management personnel;
          To include individuals with management and financial expertise commensurate with the
          size and complexity of Grady;
          To increase community representation on the new board; and
          To include selected representation from the current Authority on the new board.

It should be noted that participation by a majority of the members of the Authority on the new
Hospital Corporation board could jeopardize the effectiveness of a restructuring and the 501(c)3
status. The new Hospital Corporation could be seen as controlled by the Authority and would legally
have to be consolidated for accounting purposes and the Hospital Corporation would be subjected to
the same restrictions that apply to the Authority.

In addition to a representative sample of existing Authority members, the Task Force recommends a
board composition made up of representatives from Fulton and DeKalb counties, a state
representative, the Grady Hospital CEO, and a representative from both Emory and Morehouse

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                                       Final Report
                                       July 13, 2007

Schools of Medicine. The majority of the board should be represented by community leaders and
should be non-political appointees. The Task Force would also include community leaders from the
business, non-profit and philanthropic communities with varied expertise including persons with
expertise in managing large public or private organizations.

Establish New Corporation and Meet Legal/Accounting/Regulatory Requirements for Implementation
Consummation of a single corporation restructuring would require a number of transactions and
regulatory approvals, including the organization and IRS qualification of the new Hospital
Corporation through a determination letter as a section 501(c)3 organization.

Develop Lease and Transfer Agreement
The principal element of a restructuring is effected through the lease by the Authority of its hospital
properties and transfer of all other assets to a newly created section 501(c)3 nonprofit corporation.
The lease document would be the central and primary focus of the restructuring. The lease provisions
provide the Authority, as lessor and landlord, both economic benefits and insulation from liability,
while assuring the hospital would continue to be responsive to the health needs of all residents of the
counties. Typical provisions found in the lease agreement include:

          The Authority would continue to own the hospital as lessor and would lease the hospital for
          a 40-year term to the new Hospital Corporation as authorized by the Hospital Authorities
          Law and the Georgia Supreme Court decision.
          The lease would transfer all assets of the hospital via the lease agreement to the Hospital
          Corporation. The Authority remains owner of the assets with rights of reversion.
          The Hospital Corporation would also assume all liabilities of the Authority.
          The lease would provide for lease payments in an amount sufficient to pay the outstanding
          bonded indebtedness payments as well as any other debt.
          The lease would provide that all present employees and management personnel of the
          hospital would become employees of the new Hospital Corporation.
          The lease would require that the Hospital Corporation obtain public liability, medical
          malpractice and other insurance coverage, with the Authority as a named insured.
          The lease would contemplate and authorize the organization of affiliated and supporting
          corporations, including a parent corporation.
          The lease would provide that the Hospital Corporation, as lessee, must at all times remain a
          nonprofit corporation qualified as a tax-exempt charitable corporation under section501(c)3
          of the Internal Revenue Code.
          The lease would provide for continued treatment of indigent patients at the hospital in
          accordance with legal requirements and present practices of the hospital with continued
          funding provided by the Authority through an appropriate arrangement with Fulton and
          DeKalb county commissioners.

Complete Internal Organizational Requirements
Multiple operational changes such as legal, accounting and regulatory requirements must be met by
the hospital in connection with the implementation of the restructuring surrounding accounting,
reimbursement, licensure and contracts. The attorneys and financial consultants working on the
Transition Team should assist with this process.

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

Authorization by Authority Board of Restructuring and Execution of the Lease
Final approval by the Authority board is required for closing. The Authority should then adopt a
resolution authorizing the restructuring, the execution of the lease and implementation. The lease
should be executed on behalf of the Authority as the lessor and transferor of assets.

Restructuring is an intense and time consuming process and a proposed timetable is outlined below.

 Activity                                                          Deadline

 Decide to restructure                                             July 2007
 Pull together Transition Team, set goals and objectives           August 2007
 Develop structure, choose board                                   August 2007
 Begin bridge loan discussions                                     September 2007
 Provide advance notice and conduct public hearing                 August - September 2007
 Obtain legal/accounting and regulatory approvals                  September 2007
 Develop lease agreement                                           September 2007
 Implement relevant internal requirements                          October 2007
 Obtain final authorization and execution by HA board              November 2007

Current Situation at Grady

The financials that Alvarez & Marsal have presented to the Task Force reflect cash flow in a best case
scenario – contemplating only partial payments to the medical schools and assuming accelerated
payments from Fulton and DeKalb counties – show that Grady will be cash insolvent by year’s end.

According to the Alvarez and Marsal report, Grady has been unable to make any significant capital
improvements over the past several years, which is now impacting the quality of care. The physical
plant quality is poor and deteriorating. The information technology infrastructure necessary to bill
accurately and fully for services – is 5-10 years behind other hospitals. In order to bring the hospital
into a competitive position, Grady would need approximately $200 million - 300 million. Some
immediate needs include EKG and ultrasound devices, CT scanners and MRI and other diagnostic

Currently, Grady Hospital has no means of reserving funds for future periods. Contractually, any net
income during a fiscal year must be negotiated to be used or returned to the counties. Grady needs
the ability to build reserve funds for capital and emergency situations.

Those that know Grady well compare it to Parkland Health and Hospital System in Dallas and
Jackson Memorial Hospital in Miami. While these are both public hospitals in major urban areas,
Parkland is closest in size to Grady based on number of beds (Parkland has 796 compared to
Jackson’s 1,444). Parkland is renowned as one of the best-run public hospitals in the country. As
indicated in the recent Alvarez and Marsal report, Parkland does not compete with community
hospitals in their areas for paying patients and they end up caring for mostly Medicaid and/or
uninsured patients. Despite their classification as non-competitive, they had a relatively high
percentage of insured patients and have been investing heavily in expanding services. It should also
be noted that Jackson is partially supported by a state sales tax dedicated to the hospital.

                                 Greater Grady Task Force
                                       Final Report
                                       July 13, 2007

Current Funding Model

Fulton and DeKalb Counties – Operating and Capital Funds

Operating Funds - Fulton and DeKalb counties contract with Grady to care for indigent patients, who
would be turned away at other hospitals. The operating agreement between Grady and Fulton and
DeKalb counties was entered into in 1984 and terminates 12/31/2013. It provides for an annual
budget review by the counties to determine how much they will contribute to Grady to support

During 2006, contributions from the two counties totaled $107 million ($104.9 million in 2005 and
$105.3 million in 2004). The authority’s estimated costs and expenses incurred to provide charity and
indigent care for residents of those two counties were $187.6 million in 2005 and $171.2 million in
2004. For the past five years, Grady has provided an average of $70.5 million annually in additional
indigent care to Fulton and DeKalb residents, over and above what it receives from the counties. The
counties have no legal obligation for operating deficits. Grady has historically made up for this
shortfall by taking some of the money that it has earned for caring for non-indigent patients and using
it to help support its care of the medically indigent. This is done in lieu of making capital
improvements, investing in technology or making other investments.

Capital Funds - Grady currently has two series of tax exempt bonds outstanding that were issued in
late 1980s to renovate the hospital. The bonds were first refunded in 1993 (advance refunding) and a
second time (current refunding) in 2003 in the principal amount of approximately $258 million
(approximately $225 million outstanding currently). The bonds are currently AAA rated based on
underlying bond insurance supported by the guarantee of the county payments being made. These
bonds may not be refunded again until the fourth quarter of 2013.

Fulton and DeKalb Counties are solely responsible for payment of bonds under the bond debt service
contract and payment of debt service must come before any payment of operating expenses by the
counties. No assets or revenues of Grady are pledged to pay the bonds (but the bond contract
prohibits creation of liens on Grady assets). Under the county bond debt service contract, there are
restrictions on Grady’s ability to incur additional debt [capital expenditure financing up to $25
million (aggregate, not annual) and a line of credit that must be repaid annually].

The facilities and equipment at Grady are in dire need of capital. As with the long-term operating
potential shortfall, it is impossible to identify the exact amount of the need, but given the capital
spending level of like institutions vs. Grady over the last 10 years, the “catch-up capital” is in the
$200 million to $300 million range. A major portion of that capital is for equipment and the short-
term needs are critical. The issue is what to fund on a short-term basis and how to fund it. In a year
or so when the new management and governance system is in place, Grady must develop the scope,
secure funds for major capital expenditures and issue a new bond to fund capital. Grady can issue
new bonds but, a revenue stream must be identified to service the debt.

State of Georgia

Currently, the state has no obligation to Grady and does not guarantee its existing debt. The state
does give some money to Grady through targeted programs like the Poison Control Center, Sickle
Cell Center, Perinatal Center, etc., albeit it is unlikely those grants cover the costs to provide those
services. There are other state-funded dollars that are not being fully tapped:

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                                       Final Report
                                       July 13, 2007

•   While Grady expected $90.8 million in ICTF funds for 2006 (the same amount it received in
    2005), it actually received $68.7 million. A review of the state’s indigent care trust fund formula
    should be undertaken. Currently, Grady is the largest donor to the fund but does not receive a
    proportionate share back due to the increase in qualifying hospitals vying for a fixed pool of
•   Reimbursement from the State of Georgia under the Medicaid Upper Payment Limit Program
    decreased from $28.4 million in 2005 to $9.2 million in 2006. These are supplemental
    government payments designed to assist hospitals that serve a disproportionate number of low-
    income patients with special needs. This decline is to continue due to more individuals
    converting to managed Medicaid programs that are not eligible for UPL matching funds.
•   Graduate Medical Education - Current state law allows for up to $10,000 per resident. Current
    state funding is $2,000 per resident. Full funding would pull down an additional federal match
    and would benefit all 10 teaching hospitals around the state. For Grady, funding at the maximum
    amount allowed under state law would net approximately $12-15 million.

The catch-22 with these resources is that these dollars are dependent on accurate records and
documentation. By improving documentation and coding with improved systems, Grady could
potentially increase its revenue, but they need additional funding in order to improve their systems.

Other Counties

Grady’s primary service area is defined as the five counties from which it draws 93% of its patients.
Because Grady is the only Level I trauma center within a 100 mile radius for the metro Atlanta region
as well as the primary indigent care facility, a number of patients outside of Fulton and DeKalb
counties use the services of Grady. Grady has more than 120,000 emergency room visits and
accounts for 15% of the total ER visits in the market.

The challenge with the argument that other counties’ uninsured patients using Grady Hospital should
be paid for by those other counties is that the same argument can be made the other way around.
Grady Hospital does, in fact, treat uninsured patients coming from Gwinnett, Clayton and Cobb
counties for example. However, data also show that Gwinnett, Clayton and Cobb counties also
provide service to uninsured patients from Fulton and DeKalb counties. Complicating the issue is the
fact that while Fulton County overall sees more surrounding county uninsured patients; they don’t
necessarily get treatment at Grady. There are definitely intercounty pluses and minuses and
depending on where the data comes from, the information can be skewed. However, as one of the
state’s providers of indigent care services, Grady Memorial Hospital has been disproportionately and
uniquely disadvantaged by a lack of funding and reimbursement as it relates to patients from other
counties. In fact, all safety net hospitals are impacted by this issue.

A Georgia law passed in 1957 allows for state funds to be appropriated by the General Assembly
which, together with funds contributed from counties or philanthropic sources, could be dedicated to
a fund assisting counties in paying for hospital care provided to their indigent residents. However,
there has not been an appropriation made to this fund since its enactment.

A Georgia law passed in 1979 also recognizes that it is the state’s responsibility to assist in the
payment of cost of care for nonresident indigent patients by providing procedures for the
reimbursement of such costs from state funds. Under this scenario, the commissioner of the
Department of Community Health would adopt statewide indigence standards and each county would

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                                       July 13, 2007

make a determination of indigence for those residents who receive hospital treatment outside the
county. However, there has not been an appropriation made to this fund since its enactment.

In addition, Georgia law also requires hospitals to provide appropriate and necessary emergency
services to any pregnant woman who presents herself to the hospital in active labor. The statute
allows each hospital and physician providing treatment to bill the woman’s county of residence for
the cost of such care (defined as the prevailing Medicaid rate) and the county is required to pay the
billed amount within 120 days. Other than pregnant women, there is no law requiring counties to pay
for their indigent residents.

Overall, Grady and the surrounding counties need a net sharing agreement to resolve the issue of
paying for its uninsured residents. In other words, they need to “true up” uninsured patient payments
for fairness. The counties could resolve this “truing-up” either voluntarily or look to enforce the
above mechanisms already in place on a go forward basis. However, it is important to note that this
alone will not materially affect or solve Grady’s current financial crisis.

Impact of a Grady Closure to Metro Atlanta

Grady is a vital asset and critical health resource to this region and the State. Without Grady, caring
for the indigent population alone would put a severe strain on nearby hospitals, particularly their
emergency services. Grady’s failure and potential collapse could create a “patient tsunami” for area
hospitals and jeopardize trauma care in the State. Everyone in the region would be affected, not just
the poor and uninsured among us. The stakes are getting higher as the financial crisis grows more
severe. Sustainable reform will require a combined effort of the major stakeholders over several
years focused on internal and external root-cause issues.

Previous studies of closed hospitals, such as the 2001 closure of D.C. General Hospital in the nation’s
capitol, showed that they resulted in a patient care crisis. Thousands of emergency room and
inpatient visits were shifted to nearby Greater Southeast Hospital. As a result, in November of 2003,
Southeast filed for bankruptcy when its uninsured patient base reached 60%. Even if Grady’s insured
patient load could be absorbed by other hospitals, its uninsured patient load could not be, at least in
the short-run. The loss of Grady could cause a domino or ripple effect on health care providers
throughout the metro region.

In addition, a Grady closure would have severe consequences on area medical schools. Grady is a
nationally recognized major teaching hospital. Statewide, approximately one-fourth of Georgia’s
doctors trained at Grady.

The Task Force believes that with a combination of these recommendations and the support and the
political will of the entire community, the closure can be avoided. The critical first step is the
corporate restructure, and the first “domino” that has to happen is the Grady board’s willingness and
leadership to take this bold step. This Task Force, the leadership of the business community and the
Metro Atlanta Chamber of Commerce stand ready to assist if asked. The Task Force is also prepared
to recommend a highly effective slate of community leaders of the caliber and expertise needed to
serve on the new 501(c)3 board. Members of the Task Force appreciate the opportunity to provide
advice and recommendations to the Grady Board.

                                     Greater Grady Task Force
                                           Final Report
                                           July 13, 2007

                                Greater Grady Task Force Members

Co-Chair                                              Co-Chair
Pete Correll                                          Michael B. Russell
Chairman Emeritus                                     CEO
Georgia-Pacific Corporation                           H.J. Russell & Company

Tom Bell                                              Ben Johnson
Chairman, President and Chief Executive Officer       Managing Partner
Cousins Properties Incorporated                       Alston & Bird LLP

Ronald Brown                                          John E. Maupin, MD – ex-officio
President & CEO                                       President & CEO
Atlanta Life Financial Group, Inc.                    Morehouse School of Medicine

Robert L. Brown                                       Jim Miller
President & CEO                                       Senior Vice President and General Counsel
R.L. Brown & Associates, Inc.                         Georgia Power Company

Bill Clement                                          Dr. Carl Patton
Chairman & CEO                                        President
DOBBS, RAM & Co.                                      Georgia State University

Tommy Dortch                                          Dave Peterson
President & CEO                                       Chairman
TWD Inc.                                              North Highland

Renee Glover                                          Alana Shepherd
President & CEO                                       Founder & Foundation Board Secretary
Atlanta Housing Authority                             Shepherd Center

Phil Humann                                           Sam A. Williams
CEO                                                   President
SunTrust Banks, Inc.                                  Metro Atlanta Chamber of Commerce

Mike M. E. Johns, MD – ex-officio
Executive Vice President for Health Affairs & CEO,
Woodruff Health Sciences Center
Emory University


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